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Limiting voting power of shares in order to prevent a takeover is not a proper purpose

Eclairs Group Ltd v JFX Oil & Gas Plc [2015] UKSC 71 concerned a company with a constitution that allowed the directors to restrict the voting rights attached to the company's shares. The directors exercised their power to restrict those rights in order to pass a resolution at the company's AGM to issue shares to the public without a pre-emptive offer to existing shareholders. This was to prevent a takeover of the company by the plaintiff shareholders. The issue was whether that power had been exercised for a proper purpose.

The Court confirmed that even if powers are conferred by the constitution of a company, they still must be exercised for a proper purpose. The defendant directors had relied on an assumed failure by the plaintiff shareholders to properly disclose the nature of their shareholdings as the grounds for the restriction. However, any failure on the part of the plaintiffs to provide information did not justify restricting voting rights. Therefore, the power was not exercised for a proper purpose, despite the directors' belief that the power was exercised for the benefit of the company. The decision to restrict voting rights was set aside. Section 133 of the New Zealand Companies Act 1993 contains a similar provision requiring a director to exercise powers for a proper purpose and this decision should be kept in mind when considering that obligation.